two project ( large & small ) large : year0 =$(25,000.00) year1$600000 year2 $65
ID: 2631309 • Letter: T
Question
two project ( large & small )
large : year0 =$(25,000.00) year1$600000 year2 $650000 year3 $ 700000 year 4 $700000 year 5 $800000
small : year0=$(14,000.00) year1 $350000 year2 $400000 year3 $ 420000 year 4 $420000 year 5 $ 480000
What are :
payback period of the small project ?
Averge accounting rate of returen of the large project ?
what is the IRR of the small peoject ?
What is the NPV of the small project if the discount rate is 0% and the returned cash flow could be reinvested at 8% ?
What is the crossover IRR between the large and small project ?
if the projects are mutually exclusive, which project should be accepted ? why ?
Plz show me your work with detalis :)
Explanation / Answer
Small project Discounting rate Year 13.89 Cash flow Dsic. Cash flow 0 1.00 -1400000.00 -1400000.00 1 0.88 350000.00 307314.07 2 0.77 400000.00 308381.85 3 0.68 420000.00 284310.25 4 0.59 420000.00 249635.83 5 0.52 480000.00 250503.20 NPV 145.19 Answer to 1) Payback period 1590000 - 1400000 = 190000 cash to be generated in Year 4 = 420000 - 190000 = 230000 Time required to generate = 230000/420000 = 0.55 Payback period = year 1 + 2 + 3 + 0.55 = 3.55 years answer to 2) Average return = average income / investment = ( 600000 + 650000+ 700000 + 700000 + 800000 ) / 5 = 690000 Average return = 690000 / 2500000 = 27.6 % Answer to 3) IRR 0.1389 Answer to 4) Discounting rate Year 8 Cash flow Dsic. Cash flow 0 1.00 -1400000.00 -1400000.00 1 0.93 350000.00 324074.07 2 0.86 400000.00 342935.53 3 0.79 420000.00 333409.54 4 0.74 420000.00 308712.54 5 0.68 480000.00 326679.93 NPV 235811.62 Answer to 5) Incremental cash flows Discounting rate Year 7.725 Cash flow Dsic. Cash flow 0 1.00 -1100000.00 -1100000.00 1 0.93 250000.00 232072.41 2 0.86 250000.00 215430.41 3 0.80 280000.00 223979.63 4 0.74 280000.00 207917.97 5 0.69 320000.00 220580.68 -18.91 Crossover IRR = 7.725 % Answer to 6) LARGE Discounting rate Year 11.24 Cash flow Dsic. Cash flow 0 1.00 -2500000.00 -2500000.00 1 0.90 600000.00 539374.33 2 0.81 650000.00 525280.64 3 0.73 700000.00 508528.27 4 0.65 700000.00 457145.15 5 0.59 800000.00 469661.64 -9.98 if the projects are mutually exclusive project small shall be taken as the IRR in that case is higher i.e 13.89 %
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